No matter setbacks on the path, blockchain continues to inspire innovators to question unexamined systems and norms historically accepted as adequate, writes the Global Blockchain Business Council in their annual report.
The technology is compelling a generation of new solutions specifically built to address perennial inequities and foundational frictions across geographies and industries.
This coming year will be pivotal for blockchain as the technology continues to mature and evolve and as individual jurisdictions determine how they intend to engage with the global community. This interplay will make up the steps between promise and impact — and will hopefully contribute to an ever-growing number of real-world applications which are unlocking value for varied industries and sectors of society.
Fidelity Digital Assets
In the report, Fidelity published an article stating that institutions seeking exposure to digital assets require sophisticated services of the kind that are widely available for stocks, bonds, and other asset types. Fidelity Digital Assets, the institutional investors blockchain initiative, will provide secure, vaulted cold storage for bitcoin, ether, and other digital assets.
The firm is also building multi-venue trade execution capabilities, with order matching and routing technology and backed by a client support team. This enterprise-grade platform is built to the same tandard as exists in other Fidelity Investments businesses, while incorporating the capabilities of blockchain technology to deliver a completely new offering for institutional investors.
Fidelity started research and development efforts in 2014, bitcoin mining in 2015, and tested its first wallet and storage solution with employees in 2016. During this time the firm has seen a steady evolution of institutional demand for custody and trading services.
The idea for Fidelity Digital Assets emerged originally from a team of blockchain technologists, product managers, financial and legal specialists within the firm. This group was engaged in challenging experimentation and learning across a range of potential use cases for digital assets, which represented, initially, a departure from familiar investment tools, products and processes. Addressing custody issues for institutional investors is one critical step in order for these markets to continue to develop.
Regulatory update
Alan Cohn and Jason Weinstein from Steptoe and Johnson LLP provided a view of regulatory developments.
The primary US federal regulators of financial instruments and trading markets — the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC — took different approaches from one another and from FinCEN (Financial Crimes Enforcement Network of the United States Department of the Treasury).
The CFTC began with an aggressive enforcement agenda, bringing actions and reaching settlements to establish its jurisdiction in 2015 and 2016, but transitioning to a more collaborative approach with industry in 2017 and 2018. The SEC took a wait-and-see approach, spending more than a year assessing the 2016 sale of Decentralized Autonomous Organization (DAO) tokens before issuing an analytic report in 2017 concluding that the DAO tokens constituted securities and warning that many crypto-tokens then being sold might constitute securities or “investment contracts” under US law.
SEC enforcement actions in 2017 shed light on fraudulent token sales and other unlawful practices, but it wasn’t until 2018 that media reports of coordinated sweeps of the industry involving SEC field offices and state securities regulators slowed the sale of cryptotokens in the US market. The SEC also stated that sales of bitcoin and likely ether would not be subject to US securities laws, but the industry still awaits additional guidance on how to comply with certain US securities laws.
All of this stands in stark contrast to efforts in jurisdictions such as Switzerland, Singapore, the United Kingdom, Hong Kong, the United Arab Emirates, Bermuda, Gibraltar, and others, which have focused on developing a new regulatory framework by trying to define classes of tokens: currency tokens such as cryptocurrency; asset tokens such as securities, debt instruments, and other types of financial instruments; and utility tokens such as those that provide access to and are used on blockchain-based platforms.
This framework is still in its infancy, and guidance with respect to prudential supervision and oversight of utility tokens is still forthcoming, but a growing consensus is emerging that regulating all tokens as either a cryptocurrency or a regulated financial instrument (e.g., security or commodity) ignores the realities and innovation brought forth by crypto-tokens.
All of this begs the question: what is the correct approach for establishing a prudential oversight regime for crypto-tokens that are meant to be used for access and consumptive use on a blockchain-based platform, as opposed to capital formation?
In the US, the Congress and regulators are likely to consider whether such oversight could operate under the SEC or CFTC, under another agency like the Federal Trade Commission, or one or more self-regulatory organizations created in coordination with regulators, companies, and industry associations.
Outside of the US, in jurisdictions creating a new regulatory framework for utility tokens, regulators will need to build a prudential oversight regime for this new category of assets. In both cases, regulators should be mindful of ways in which a new prudential oversight regime would promote or complicate compliance. Hopefully 2019 will bring greater clarity on this issue, both in the US and abroad.
2019 represents an opportunity to continue to build value while simultaneously breaking down superfluous barriers and silos, creating more fair, functional and efficient societies in the process.